Senate Comes Together to Trigger Stampede for Oil in New Areas Statewide

Published: April 14, 2012

Plan similar to "Cook Inlet Stampede" legislation two years ago which prompted significant new production

JUNEAU-Today, the Alaska State Senate passed a measure that creates meaningful tax breaks and incentives for oil and gas production in new oil fields across the state. House Bill 276, sponsored by Rep. Steve Thompson, R-Fairbanks, started in the House as a plan to generate activity in certain basins that are not part of the North Slope. Today's changes expand the scope of the bill to include new areas of the North Slope that are outside of existing units.

"One of the main priorities for the Senate Bipartisan Working Group is to put more oil in the pipeline," said Senate President Gary Stevens. "This measure creates the big incentives that the industry needs to explore and drill in these new areas. New development, regardless of where it is, will mean new oil in the pipeline."

The legislation would keep the state's current oil tax structure, Alaska's Clear and Equitable Share (ACES), but would provide a 30% gross allowance on production from new fields. The measure will lower total government take on oil from new fields by 12-13% according to modeling from the Legislature's consultants PFC Energy. The PFC's models predict that at $80 a barrel, the government would take 57% of the profits from oil production. At $90 a barrel, it would be 60%. At $110 a barrel, it would be 63%. The range is right where worldwide oil and gas tax consultant Pedro Van Meurs said Alaska needs to be for new sources of light oil.

A gross revenue allowance was chosen as the mechanism to incentivize new production because it fit within the existing structure of the ACES fiscal system without creating complex cost allocation issues. PFC Energy had presented the concept of a gross revenue allowance to the Senate Finance Committee in mid-March during the Committee's multi-week long deliberations on oil taxes. "This gross revenue allowance creates a simple but effective incentive for the development of new oil fields and does so without adding to an already generous system of tax credits or otherwise complicating an already highly complex tax code," said Senator Bert Stedman, co-chair of the Senate Finance Committee.

While this new incentive does not include the legacy fields and other fields already in production in Alaska, the Senate believes it is important not to wait any longer to incentivize this new production. "North Slope production is declining and the development of these new areas will take time," said Senator Lesil McGuire, R-Anchorage. "That is why we need to pass this provision now and start a stampede in the new areas on the slope and across the state."

The underlying House Bill 276 works in much the same way as a measure adopted in 2010 by the Legislature, which triggered a "stampede" on new exploration and development in Cook Inlet. Then Senate Bill 309 created a special credit to incentivize drilling from a jack-up rig in underexplored depths in the Cook Inlet basin. As a result, Cook Inlet has seen two jack-up rigs and a slew of other exploration and development which is now widely considered a revitalization of the Cook Inlet basin. House Bill 276 contains similar provisions for the Nenana, Northwest and other unexplored basins across the state.

"These targeted tax incentives will return the investment guarantees that so many Alaskans want to see from our tax structure," noted Senator Joe Thomas, D-Fairbanks. "Our neighbors in Southcentral have benefited from having low cost gas at their doorstep. When companies explore for oil, they often discover gas as well; imagine the possibilities for Interior Alaska if we also had similar supplies of affordable energy in our backyard."